India's trade contradictions

WTO experience highlights India's less-than-coherent approach towards trade

At the World Trade Organization (WTO) headquarters in Geneva, there will be an enormous sense of relief: A global body that most had assumed was beyond rescue has shown signs of life. The just concluded twelfth ministerial meeting of the WTO went well beyond its scheduled time to come to a series of agreements on several controversial issues, from fishing subsidies to vaccine patent protection.

What is important from an Indian point of view here is three things. First, India’s rhetoric has not changed at the WTO, and it once again soaked up all the attention as a possible spoiler, thanks to charged interventions by senior officials. Second, in spite of the rhetoric, India’s negotiators significantly watered down their opposition in order to ensure an agreement was reached — and, unlike on previous such occasions, the need for consensus was considered great enough that other parties also sought to meet some of India’s concerns. And finally, once again many of India’s actual positions did not seem to necessarily align with its actual economic interests.

The broader question raised by these three facts is this: What can we infer from India’s new stance on trade and global integration from its attitude at the WTO when set aside other recent advances?

Here is a short and incomplete timeline of Indian actions on economic integration over the past three years. In late 2019, a few months before the pandemic hit, India decided to stay out of the Regional Comprehensive Economic Partnership, which joined several countries and regions with which India already had free trade agreements —Japan, Korea, and the Association of South East Asian Nations — with Australia, New Zealand, and the People’s Republic of China in a broader trade pact. This seemed to cap some years of trade scepticism in New Delhi.

Shortly after the pandemic hit, the prime minister announced his new slogan of “self-reliance” or “aatmanirbharta” which has now become something of a touchstone for his government’s policy decisions. This was also interpreted by many as a desire to reduce possible external dependencies built up by trade. Then, after the clashes on the Sino-Indian border, steps were taken to check Chinese investment into India, and informal trade restrictions placed on the goods trade with the PRC. On the plus side of the ledger, though, new production-linked incentive schemes (PLI) — however poorly designed — did directly target an increase in exports.

Illustration: Ajay Mohanty

 

More recently, two near-contradictory impulses have been visible. On the one hand, there is clear and welcome effort being put into negotiating bilateral trade deals, even if relatively shallow. Two such agreements have already been announced with the UAE and Australia. During the visit of the British prime minister to New Delhi earlier this year, a target of Diwali was set for an agreement between the UK and India. There is also a great deal of energy being displayed in the trade relationship between India and the European Union (EU), especially following the visit of European Commission President Ursula von der Leyen, during which a “Trade and Technology Council” was announced that would hopefully address some of the irritants that stand in the way of a broader EU-India trade deal. Resumption of negotiations on such a deal after almost a decade has also been announced.

Contradicting this energy, however, is the first response of the government to conditions of high inflation, which included export restrictions and taxes — among other things — on wheat and steel. The wheat export ban came just weeks after the prime minister promised to feed the world from Indian foodgrain stocks. And the steel industry pointed to the confusing impulse to both target exports through subsidies and then impose an export tax.

Investors into India also detect contradictory impulses. On the one hand, there is no doubt that several of the PLI schemes, such as those for mobile handsets and for chipset manufacturing, were designed after close consultations with possible investors from the global private sector. On the other hand, investors also insist that much of the broader arrogance in New Delhi about the size of the Indian domestic market and therefore its magnetic attraction for global investment has not abated. They insist this false assumption lures policymakers into a fatal overconfidence.

The WTO experience, where India’s overblown rhetoric and its quieter willingness to compromise on certain key issues appear to contradict each other, is actually a fair representation of the overall incoherence in India’s trade policy. It is vital for the government therefore to do three things.

First, government officials should ratchet down their tendency to describe trade restrictions as a “win” for India or for “aatmanirbharta”. Even if trade and investment restrictions are being argued for or imposed, it is important to shift emphasis and now describe them as temporary, or necessitated by transient conditions, rather than as an effective reflection of a new, across-the-board, “self-reliance” policy.

Second, a more comprehensive and consistent trade policy needs to be evolved, even if it is not released to the public. This might help prevent first responses to problems like inflation being dangerous restrictions on trade, for example. It would also force the government to confront contradictions in its own actions, for example between the PLI and export taxes. Finally, it might also convince policymakers of the importance of reliable streams of imports in order to grow exports in an age of global value chains. This might also lead to less emphasis on headline-friendly “big” deals with marquee manufacturers and more attention being paid to the building of the ecosystem of smaller producers and frictionless trade that such deals need to be successful over time.

And third, it must recognise that its arrogance about trade and investment is counter-productive. What private sector investors say to officials in private about their supposed enthusiasm for the Indian market is not reflected in the actual investment numbers into manufacturing in particular; it is born of a simple desire to stay on the good side of the government, and is nothing like what the private sector says when the government is not the target audience. At a time when India is competing with far more integrated economies, from Bangladesh to Vietnam, for an ex-China investment, it should be a little humbler about policymaking.

The writer is head of the Economy and Growth Programme at the Observer Research Foundation, New Delhi